Chapter 12

Partnerships
Review Questions
1. Define a partnership its characteristics.

A Partnership is a business with two or more owners that is not organized as a corporation. A
partnership's has a written agreement—called a partnership agreement, limited life, mutual agency,
unlimited personal liability, co-ownership of property, no partnership income tax, and partners’
capital accounts.

2. What is the meaning of unlimited personal liability?

Unlimited Personal Liability is when a partnership (or a sole proprietorship) cannot pay its debts
with business assets, and the partners (or the proprietor) must use personal assets to meet the debt.

3. What features are similar between a partnership and sole proprietorship?

Neither partnerships nor sole proprietorships are a legal entity. The partners of a business have
unlimited personal liability similar to a sole proprietor. Neither pay business income tax.

4. Explain the criteria for partner withdrawal of cash and other assets.

Partners can withdraw cash or other assets from the partnership based on what is allowed by the
written partnership agreement. Withdrawals (drawings) from a partnership are recorded in an equity
account.

5. Discuss admission of a new partner by purchasing an existing partner’s interest.

A person can become a partner by purchasing an existing partner’s interest. First, however, the new
person must gain the approval of the other partners. The purchase of an existing partner’s interest is
a personal transaction between the two individuals and not the partnership.

Admission of a partner by purchasing an existing partner’s interest has two important characteristics:
a. The only journal entry the partnership records is the transfer of partner’s capital. It does not
record the transfer of cash from the new partner to the existing partner.
b. Admission of the partner does not affect total assets, liabilities, and equity. It simply transfers
capital from one partner’s account to another’s.

6. Explain the ways to be a partner by contributing to the partnership or directly to the business.

An individual can contribute to a partnership at book value. The partnership would record a debit for
the assets contributed and a credit to the new partner’s capital account. Existing partners might
receive a bonus upon the admission of a new partner. This bonus increases the capital account of
each of the existing partners on the basis of their profit-and-loss-sharing ratios. Admission of a new
partner might involve a bonus to the new partner. This bonus decreases the capital account of each of
the existing partners on the basis of their profit-and-loss-sharing ratios.
© 2016 Pearson Education, Ltd. 12-1
7. What does liquidation mean?

Liquidation is the process of going out of business by selling the entity’s assets, paying its liabilities,
and distributing any remaining cash to the owners based on their equity balances.

8. Describe an S corporation.

An S corporation is a corporation with 100 or fewer stockholders that can elect to be taxed as a
partnership. This form of business organization comes from Subchapter S of the U.S. Internal
Revenue Code. An S corporation offers its owners (called stockholders) the benefits of a corporation
—no personal liability for business debts—and of a partnership—no double taxation. An ordinary
(Subchapter C) corporation is subject to double taxation.

9. Why does each partner need a separate capital account?

Accounting for a partnership is much like accounting for a sole proprietorship. Because a partnership
has more than one partner (owner), each partner needs a separate capital account.

10. Why does a partnership not pay business income tax?

A partnership pays no business income tax. Instead, the net income of the business flows through
and becomes the taxable income of the individual partners. The profits and losses of the partnership
pass through to the partners, who then pay personal income tax on their share of the income.

11. How can partnership profits and losses be allocated?

A partnership can allocate profits and losses in any manner chosen by the partners and specified in
the partnership agreement. In the absence of a specified method, the partners share profits and losses
equally. Typical arrangements used include a stated ratio, sharing based on each partner’s capital
balance, sharing based on each partner’s service, and sharing based on some combination of a stated
ratio, capital balances, and service.

12. What is the effect on total assets, liabilities, and equity of a partnership when a partner is admitted by
purchasing an existing partner’s interest? Why?

There is no effect on total assets, liabilities, and equity of a partnership when a partner is admitted by
purchasing an existing partner’s interest. The transaction simply transfers capital from one partner’s
account to another’s. The partnership does not receive cash because the transaction is between the
old partner and the new partner.

13. What is the effect on the existing partners’ capital accounts if a bonus is paid to a new partner upon
admission into the partnership?

When a new partner receives a bonus upon admission to a partnership, the capital accounts of the
existing partners are decreased according to the stated ratio for profits and losses set forth in the
partnership agreement. If the partnership agreement does not specify a ratio for profits and losses,
the bonus is shared equally among the capital accounts of the existing partners.

© 2016 Pearson Education, Ltd. 12-2

14. What does dissolution mean?

Dissolution is the ending of a partnership. This could be because of the death of a partner, the
withdrawal of a partner over a dispute, the retirement of a partner, or the addition of a new partner.

15. How does liquidation of a partnership differ from dissolution?

The admission or withdrawal of a partner dissolves the partnership. However, it may continue
operating with no apparent change to outsiders. In contrast, liquidation shuts down the business by
selling its assets and paying its liabilities. The final step in liquidation is to distribute any remaining
cash to the owners based on their equity balances. Before a business is liquidated, its books should
be adjusted and closed.

16. What are the three steps involved in liquidation of a partnership?

The three steps to liquidating a partnership are:

Step 1: Sell the non-cash assets. Allocate the gain or loss to the partners’ capital accounts
based on the profit-and-loss-sharing ratio.
Step 2: Pay all partnership liabilities.
Step 3: Pay the remaining cash, if any, to the partners based on their capital balances, not
their profit-and-loss-sharing agreement.

17. Gives three advantages and disadvantages of a partnership.

Partnership can raise more capital than sole proprietorships but are less expensive to organize than a
corporation, which requires a charter from the state. A Partnership brings together the abilities of
more than one person and partners working well together can add more value than by working alone.
There’s no double taxation. Partnership income is taxed only to the partners as individuals.

On the other hand, Partnership agreement may be difficult to formulate. Each time a new partner is
admitted or a partner withdraws, the business needs a new partnership agreement. Relations among
partners may be fragile. Mutual agency and unlimited liability create personal obligations for each
partner.

© 2016 Pearson Education, Ltd. 12-3

Short Exercises
S12-1 Determining the characteristics of a partnership
Learning Objective 1

Study the characteristics of a partnership.

Requirements
1. List five advantages of a partnership over a sole proprietorship and a corporation.
2. List three disadvantages of a partnership compared to a sole proprietorship and a corporation.

SOLUTION

Requirement 1

Five advantages of a partnership over a sole proprietorship or corporation are:

a. Partnerships can raise more capital.
b. Partnerships bring together the abilities of more than one person.
c. Partners working well together can add more value than by working alone.
d. Partnerships are less expensive to organize than a corporation, which requires a charter from the
state.
e. There is no double taxation. Partnership income is taxed only to the partners as individuals.

Requirement 2

Three disadvantages of a partnership compared to a sole proprietorship or corporation are:

a. A partnership agreement may be difficult to formulate. Each time a new partner is admitted or a
partner withdraws, the business needs a new partnership agreement.
b. Relations among partners may be fragile.
c. Mutual agency and unlimited liability create personal obligations for each partner.

© 2016 Pearson Education, Ltd. 12-4

S12-2 Accounting for partner contributions
Learning Objective 2

On January 1, 2016, Jeffrey Madaras contributes land in a partnership with Dave Adams. Madaras
purchased the land in 2011 for $300,000. A real estate appraiser now values the land at $625,000.
Madaras wants $625,000 capital in the new partnership, but Adams objects. Adams believes that
Madaras’s capital contribution should be measured by the book value of his land. Adams and Madaras
seek your advice.

Requirements
1. Which value of the land is appropriate for measuring Madaras’s capital—book value or current
market value?
2. Give the partnership’s journal entry to record Madaras’s contribution in the business.

SOLUTION

Requirement 1

Madaras’s capital contribution of land should be valued at current market value.

Requirement 2

Date Accounts and Explanation Debit Credit

2016
Jan. 1 Land 625,000
Madaras, Capital 625,000
To record Madaras’s contribution.

© 2016 Pearson Education, Ltd. 12-5

S12-3 Accounting for partner contributions
Learning Objective 2

Sheena Kennet and Patricia Waters are forming a partnership to develop a theme park near Carlson City,
Florida. Kennet contributes cash of $1,500,000 and land with a current market value of $9,500,000.
When Kennet purchased the land in 2013, its cost was $5,500,000. The partnership will assume
Kennet’s $2,750,000 note payable on the land. Waters contributes cash of $3,500,000 and equipment
with a current market value of $6,000,000.

Requirements
1. Journalize the partnership’s receipt of assets and liabilities from Kennet and from Waters.
2. Compute the partnership’s total assets, total liabilities, and total partners’ equity immediately after
organizing.

SOLUTION

Requirement 1

Date Accounts and Explanation Debit Credit

Cash 1,500,000
Land 9,500,000
Note Payable 2,750,000
Kennet, Capital 8,250,000
To record Kennet’s contribution.

Cash 3,500,000
Equipment 6,000,000
Waters, Capital 9,500,000
To record Waters’s contribution

Requirement 2

KENNET & WATERS

Balance Sheet
January 1, 201X

Assets Liabilities
Cash $ 5,000,000 Note Payable $ 2,750,000
Land 9,500,000
Equipment 6,000,000 Partners’ Equity
Kennet, Capital 8,250,000
Waters, Capital 9,500,000
Total Partners’ Equity 17,750,000
Total Assets $ 20,500,000 Total Liabilities and Partners’ Equity $ 20,500,000

© 2016 Pearson Education, Ltd. 12-6

S12-4 Allocating profits and losses to the partners
Learning Objective 3

Brown and Bothwell had beginning capital balances of $20,000 and $16,000, respectively. The two
partners fail to agree on a profit-and-loss-sharing ratio. For the first month (June 2016), the partnership
has a net loss of $7,000.

Requirements
1. How much of this loss goes to Brown? How much goes to Bothwell?
2. The partners withdrew no assets during June. What is each partner’s capital balance at June 30?
Prepare a T-account for each partner’s capital account.

SOLUTION

Requirement 1

In the absence of a partnership agreement, the partners share profits and losses equally. For the first
month, June 2016, the partners share the $7,000 net loss equally; Brown has a $3,500 net loss as does
Bothwell.

Requirement 2

Income Summary Brown, Capital Bothwell, Capital

Bal. 7,000 7,000 Clos.3 20,000 Jun. 1 16,000 Jun. 1
Bal. 0 Clos.3 3,50 Clos.3 3,500
0
16,500 Bal. 12,500 Bal.

© 2016 Pearson Education, Ltd. 12-7

S12-5 Allocating profits and losses to the partners
Learning Objective 3

Adler, Milton, and Bryant have capital balances of $20,000, $30,000, and $50,000, respectively. The
partners share profits and losses as follows:
a. The first $30,000 is divided based on the partners’ capital balances.
b. The next $30,000 is based on services, shared equally by Adler and Bryant. Milton does not receive
a salary allowance.
c. The remainder is divided equally.

Requirements
1. Compute each partner’s share of the $72,000 net income for the year.
2. Journalize the closing entry to allocate net income for the year.

SOLUTION

Requirement 1

Share of
Capital % Share of Service Share Remaining
Partner % $30,000 of $30,000 $12,000 Total Share
Adler 20% $ 6,000 $ 15,000 $ 4,000 $ 25,000
Milton 30% 9,000 0 4,000 13,000
Bryant 50% 15,000 15,000 4,000 34,000
100% $ 30,000 $ 30,000 $ 12,000 $ 72,000

Requirement 2

Date Accounts and Explanation Debit Credit

Income Summary 72,000
Adler, Capital 25,000
Milton, Capital 13,000
Bryant, Capital 34,000
To close Income Summary account to partners’ capital.

© 2016 Pearson Education, Ltd. 12-8

S12-6 Accounting for the admission of a new partner
Learning Objective 4

Stephanie Simmons has a capital balance of $38,000; Emerson St. Mark’s balance is $20,000. Edward
Haskins pays $140,000 to purchase St. Mark’s interest in the Simmons & St. Mark partnership. St. Mark
receives the full $140,000.

Requirements
1. Journalize the partnership’s transaction to admit Haskins to the partnership.
2. Must Simmons accept Haskins as a full partner? What rights does Haskins have after purchasing St.
Mark’s interest in the partnership?

SOLUTION

Requirement 1

Date Accounts and Explanation Debit Credit

St. Mark, Capital 20,000
Haskins, Capital 20,000
To record Haskins’s purchase of St. Mark’s partnership
interest.

Requirement 2

Simmons has the right to refuse to accept Haskins into the partnership. After being accepted into the
partnership and purchasing the partnership interest of St. Mark, Haskins has the full rights of a partner.
However, Simmons has to agree to this change.

© 2016 Pearson Education, Ltd. 12-9

S12-7 Accounting for the admission of a new partner
Learning Objective 4

Pelletier has $107,000 capital and Haymer has $55,000 capital in the Pelletier & Haymer partnership.
Pelletier and Haymer share profits and losses equally. Todd Parker contributes cash of $54,000 to
acquire a 1/4 interest in the new partnership.

Requirements
1. Calculate Parker’s capital in the new partnership.
2. Journalize the partnership’s receipt of the $54,000 from Parker.

SOLUTION

Requirement 1

Partnership capital before admission of new partner ($107,000 + $55,000) $ 162,000

Contribution of new partner, Parker 54,000
Partnership capital after admission of new partner $ 216,000

Capital of new partner, Parker ($216,000 × 1/4) $ 54,000

Requirement 2

Date Accounts and Explanation Debit Credit

Cash 54,000
Parker, Capital 54,000
To record Parker’s contribution.

© 2016 Pearson Education, Ltd. 12-10

S12-8 Accounting for the admission of a new partner
Learning Objective 4

Edgar and Hawk have partner capital balances of $257,000 and $223,000, respectively. Edgar receives
70% of profits and losses, and Hawk receives 30%. Assume Price contributes $120,000 to acquire a
25% interest in the new partnership of Edgar, Hawk, and Price.

Requirements
1. Calculate Price’s capital in the new partnership.
2. Journalize the partnership’s receipt of cash from Price.

SOLUTION

Requirement 1

Partnership capital before admission of new partner ($257,000 + $223,000) $ 480,000

Contribution of new partner, Price 120,000
Partnership capital after admission of new partner $ 600,000

Capital of new partner, Price ($600,000 × 1/4) $ 150,000

Contribution of new partner, Price (120,000)
Bonus to new partner, Price $ 30,000

Requirement 2

Date Accounts and Explanation Debit Credit

Cash 120,000
Edgar, Capital 21,000
Hawk, Capital 9,000
Price, Capital 150,000
To record Price’s contribution & bonus.

© 2016 Pearson Education, Ltd. 12-11

S12-9 Accounting for withdrawal of a partner
Learning Objective 5

Jason River, Sara Down, and Cam Preti each have a $240,000 capital balance. They share profits and
losses as follows: 2:2:6 to River, Down, and Preti, respectively. Suppose Preti is withdrawing from the
business.

Requirements
1. Journalize the withdrawal of Preti if the partnership agrees to pay Preti $240,000 cash.
2. Journalize the withdrawal of Preti if the partnership agrees to pay Preti $210,000 cash.

SOLUTION

Requirement 1

Date Accounts and Explanation Debit Credit

Preti, Capital 240,000
Cash 240,000
To record withdrawal of Preti from the partnership.

Requirement 2

Date Accounts and Explanation Debit Credit

Preti, Capital 240,000
River, Capital ($30,000 × 1/2) 15,000
Down, Capital ($30,000 × 1/2) 15,000
Cash 210,000
To record withdrawal of Preti from the partnership.

S12-10 Accounting for withdrawal of a partner

Learning Objective 5

Jonah Allocca, Jacob Castaneda, and Kelly Schrup each have a $70,000 capital balance. Allocca is
retiring from the business. The profit-and-loss-sharing ratio is 2:3:2, respectively. Journalize the
payment of $80,000 to Allocca upon his retirement on July 31.

SOLUTION

Date Accounts and Explanation Debit Credit

201X
Jul. 31 Allocca, Capital 70,000
Castandea, Capital ($10,000 × 3/5) 6,000
Schrup, Capital ($10,000 × 2/5) 4,000
Cash 80,000
To record withdrawal of Allocca from the partnership.

© 2016 Pearson Education, Ltd. 12-12

S12-11 Accounting for the liquidation of a partnership
Learning Objective 6

The Kaley McAnally & Liz Korniyenko partnership has the following balances on June 30, 2016:

McAnally and Korniyenko share profits 3:1, respectively. McAnally and Korniyenko decide to liquidate
the partnership. Journalize the sale of the non-cash assets for $11,500, the payment of the liabilities, and
the payment to the partners.

SOLUTION

Date Accounts and Explanation Debit Credit

2016
Jun. 30 Cash 11,500
Loss on Disposal 4,000
Non-cash Assets 15,500
To record the sale of the Non-cash Assets at liquidation.

30 McAnally, Capital ($4,000 × 3/4) 3,000

Korniyenko, Capital ($4,000 × 1/4) 1,000
Loss on Disposal 4,000
To allocate the loss on liquidation of non-cash assets.

30 Accounts Payable 25,000

Cash 25,000
To record the payment of the outstanding liabilities.

30 McAnally, Capital ($7,000 – $3,000) 4,000

Korniyenko, Capital ($8,500 – $1,000) 7,500
Cash 11,500
To distribute remaining cash based on partners’ capital
balances.

© 2016 Pearson Education, Ltd. 12-13

S12-12 Accounting for the liquidation of a partnership
Learning Objective 6

The Jackson & Mack partnership has the following balances on December 31, 2016:

Jackson and Mack share profits 1:1, respectively. Jackson and Mack decide to liquidate the partnership.
Journalize the sale of the non-cash assets for $56,000, the payment of the liabilities, and the payment to
the partners. Assume Mack contributes cash equal to the capital deficiency.

SOLUTION

Date Accounts and Explanation Debit Credit

2016
Dec. 31 Cash 56,000
Loss on Disposal 48,000
Non-cash Assets 104,000
To record the sale of the non-cash assets at liquidation

31 Jackson, Capital ($48,000 × 1/2) 24,000

Mack, Capital ($48,000 × 1/2) 24,000
Loss on Disposal 48,000
To allocate the loss on liquidation of non-cash assets.

31 Accounts Payable 84,000

Cash 84,000
To record the payment of the outstanding liabilities.

31 Cash 6,000
Mack, Capital 6,000
Receipt of cash for Mack’s capital deficiency.

31 Jackson, Capital 26,000

Cash 26,000
To distribute remaining cash based on partners’ capital
balances.

© 2016 Pearson Education, Ltd. 12-14

Exercises
E12-13 Describing characteristics of a partnership
Learning Objective 1

Cameron Blair, a friend from college, asks you to form a partnership to import fragrances. Since
graduating, Blair has worked for the Spanish Embassy, developing important contacts among
government officials. Blair believes she is in a unique position to capitalize on an important market.
With expertise in accounting, you would have responsibility for the partnership’s accounting and
finance. List the seven items that would need to be incorporated into the written partnership agreement.

SOLUTION

The seven items that need to be incorporated into the partnership agreement are:
1. Name, location, and nature of the business
2. Name, capital contribution, and duties of each partner
3. Procedures for admitting a new partner
4. Method of sharing profits and losses among the partners
5. Methods of withdrawal of assets by the partners
6. Procedures for withdrawal of a partner from the partnership
7. Procedures for liquidating the partnership—selling the assets, paying the liabilities, and giving any
remaining cash to the partners

© 2016 Pearson Education, Ltd. 12-15

E12-14 Accounting for partner contributions and preparing partnership financial statements
Learning Objective 2
1. Darrius, Capital $88,000 CR

On December 31, 2016, Dana Darrius and Lou Gardner agree to combine their sole proprietorships into
a partnership. Their balance sheets on December 31 are shown as follows.

Requirements
1. Journalize the contributions of Darrius and Gardner to the partnership.
2. Prepare the partnership balance sheet at December 31, 2016.

© 2016 Pearson Education, Ltd. 12-16

SOLUTION

Requirement 1

Date Accounts and Explanation Debit Credit

2016
Dec. 31 Cash 10,000
Accounts Receivable 19,000
Merchandise Inventory 49,000
Plant Assets 106,000
Accounts Payable 30,000
Other Accrued Payables 12,000
Notes Payable 54,000
Darrius, Capital 88,000
To record Darrius’s contribution.

Dec. 31 Cash 9,000

Accounts Receivable 5,000
Merchandise Inventory 32,000
Plant Assets 53,000
Accounts Payable 17,000
Gardner, Capital 82,000
To record Gardner’s contribution.

Requirement 2

DARRIUS & GARDNER

Balance Sheet
December 31, 2016

Assets Liabilities
Cash $ 19,000 Accounts Payable $ 47,000
Accounts Receivable 24,000 Other Accrued Payables 12,000
Merchandise Inventory 81,000 Notes Payable 54,000
Plant Assets, Net 159,000 Total Liabilities 113,000

Partners’ Equity
Darrius, Capital 88,000
Gardner, Capital 82,000
Total Partners’ Equity 170,000
Total Assets $ 283,000 Total Liabilities and Partners’ Equity $ 283,000

© 2016 Pearson Education, Ltd. 12-17

E12-15 Accounting for partner contributions
Learning Objective 2
1. Building $95,000 DR

Nancy Fabio has been operating an apartment-locator service as a sole proprietorship. She and Melissa
Motts have decided to form a partnership. Fabio’s contribution consists of Cash, $4,000; Accounts
Receivable, $13,000; Furniture, $15,000; Building (net), $54,000; and Notes Payable, $14,000.
To determine Fabio’s equity in the partnership, she and Motts hire an independent appraiser. The
appraiser values all the assets and liabilities at their book value except the building, which has a current
market value of $95,000. Also, there are additional Accounts Payable of $9,000 that Fabio will
contribute. Motts will contribute cash equal to Fabio’s equity in the partnership.

Requirements
1. Journalize the entry on the partnership books to record Fabio’s contribution.
2. Journalize the entry on the partnership books to record Motts’s contribution.

SOLUTION

Requirement 1

Date Accounts and Explanation Debit Credit

Cash 4,000
Accounts Receivable 13,000
Furniture 15,000
Building 95,000
Accounts Payable 9,000
Notes Payable 14,000
Fabio, Capital 104,000
To record Fabio’s contribution.

Requirement 2

Date Accounts and Explanation Debit Credit

Cash 104,000
Motts, Capital 104,000
To record Motts’s contribution.

© 2016 Pearson Education, Ltd. 12-18

E12-16 Allocating profits and losses to the partners
Learning Objective 3
2. Willmann, Capital $39,800 CR

Mai Pavel and Renee Willmann have formed a partnership. During their first year of operations, the
partnership earned $70,000. Their profit-and-loss-sharing agreement states that, first, each partner will
receive 10% of their capital balances. The second level is based on services, with $5,000 to Pavel and
$20,000 to Willmann. The remainder then will be shared 3:2 between Pavel and Willmann, respectively.

Requirements
1. Calculate the amount of income each partner will receive under their profit-and-loss-sharing
agreement assuming Pavel’s capital balance is $90,000 and Willmann’s capital balance is $90,000.
2. Journalize the entry to close the Income Summary account for the year.

SOLUTION

Requirement 1

Share of
Capital 10% Share of Service Share Remaining
Partner % Capital Balance of $25,000 $27,000 Total Share
Pavel 50% $ 9,000 $ 5,000 $ 16,200 $ 30,200
Willmann 50% 9,000 20,000 10,800 39,800
100% $ 18,000 $ 25,000 $ 27,000 $ 70,000

Calculations:
$90,000 × 10% = $9,000
($70,000 − $18,000 − $25,000) × (3/5) = $16,200
($70,000 − $18,000 − $25,000) × (2/5) = $10,800

Requirement 2

Date Accounts and Explanation Debit Credit

201X
Dec. 31 Income Summary 70,000
Pavel, Capital 30,200
Willmann, Capital 39,800
To close Income Summary account to partners’ capital.

© 2016 Pearson Education, Ltd. 12-19

E12-17 Allocating profits and losses to the partners
Learning Objective 3
c. Frasier’s share $88,400

Bob Frasier and Jack Hannigan form a partnership, contributing $105,000 and $35,000, respectively.
Determine their shares of net income or net loss for each of the following independent situations:
a. Net loss is $100,000 and the partners have no written partnership agreement.
b. Net income is $60,000 and the partnership agreement states that the partners share profits and losses
on the basis of their capital balances.
c. Net income is $130,000. The first $78,000 is shared on the basis of capital balances. The next
$39,000 is based on partner service, with Frasier receiving 60% and Hannigan 40%. The remainder
is shared equally.

SOLUTION

Requirement 1

Net income (loss)

Situatio Frasier Hannigan Total
n
a. $ (50,000) $ (50,000) $ (100,000)
b. 45,000 15,000 60,000
c. 88,400 41,600 130,000

a. In the absence of a partnership agreement, all profits and losses are shared equally. In this situation,
Frasier and Hannigan each sustain a net loss of $50,000.

b. Frasier’s share of the profits and losses is 3/4 ($105,000 / $140,000)

Hannigan’s share of the profits and losses is 1/4 ($35,000 / $140,000)
Frasier’s share of the net income is $45,000 ($60,000 × 3/4)
Hannigan’s share of the net income is $15,000 ($60,000 × 1/4)

c. Frasier receives 3/4 of the first $78,000, 60% of the next $39,000, and 50% of the remaining
Remaining = $130,000 − $78,000 − $39,000 = $13,000
($78,000 × 3/4) + ($39,000 × 60%) + ($13,000 × 50%)
$58,500 + $23,400 + $6,500 = $88,400

Hannigan receives 1/4 of the first $78,000, 40% of the next $39,000, and 50% of the remaining
Remaining = $130,000 − $78,000 − $39,000 = $13,000
($78,000 × 1/4) + ($39,000 × 40%) + ($13,000 × 50%)
$19,500 + $15,600 + $6,500 = $41,600

© 2016 Pearson Education, Ltd. 12-20

E12-18 Journalizing withdrawal of cash from partnership
Learning Objective 3
3. Hart, Capital $54,350

Kelly Freeley and Brendan Hart form a partnership on March 1, 2016, contributing $56,250 and
$18,750, respectively. The partnership had net income of $160,000. Based on the partnership agreement,
Kelly Freeley’s share of net income was $94,400 and Brendan Hart’s share was $65,600. Kelly Freeley
and Brendan Hart each withdrew cash of $30,000 for personal use during the year.

Requirements
1. Journalize the entry to close net income to the partners.
2. Journalize closing the partners’ withdrawal accounts. Explanations are not required.
3. Calculate the balances in each partner’s capital account after allocation of net income and partners’
withdrawals of cash. (Assume the partnership’s accounting year began on January 1, 2016, and
ended on December 31, 2016.)

© 2016 Pearson Education, Ltd. 12-21

SOLUTION

Requirement 1

Date Accounts and Explanation Debit Credit

2016
Dec. 31 Income Summary 160,000
Freely, Capital 94,400
Hart, Capital 65,600
To close Income Summary account to partners’ capital.

Requirement 2

Date Accounts and Explanation Debit Credit

2016
Dec. 31 Freely, Capital 30,000
Hart, Capital 30,000
Freely, Withdrawals 30,000
Hart, Withdrawals 30,000
To close partner withdrawals to partners’ capital.

Requirement 3

FREELY & HART

Statement of Partners’ Equity
For The Year Ended December 31, 2016

Freely Hart Total

Capital, January 1, 2016 $ 0 $ 0 $ 0
Partner contributions 56,250 18,750 75,000
Net income 94,400 65,600 160,000
150,650 84,350 235,000
Partner withdrawals (30,000) (30,000) (60,000)
Capital, December 31, 2016 $ 120,650 $ 54,350 $ 175,000

© 2016 Pearson Education, Ltd. 12-22

E12-19 Accounting for the admission of a new partner
Learning Objective 4
2.c. Nedia, Capital $3,750 CR

Hadley Harris is admitted to the partnership of Reamey & Nedia. Prior to her admission, the partnership
books show Gabby Reamey’s capital balance at $100,000 and Carlos Nedia’s at $50,000. Assume
Reamey and Nedia share profits and losses equally.

Requirements
1. Compute each partner’s equity on the books of the new partnership under the following plans:
a. Harris pays $85,000 for Nedia’s equity. Harris pays Nedia directly.
b. Harris contributes $50,000 to acquire a 1/4 interest in the partnership.
c. Harris contributes $60,000 to acquire a 1/4 interest in the partnership.
2. Journalize the entries for admitting the new partner under plans a, b, and c.

SOLUTION

Requirement 1

a.

Reamey Nedia Harris

Partnership capital before admission of Harris $100,000 $ 50,000 $ 0
Effect on capital balance as a result of admission of Harris 0 (50,000) 50,000
Partnership capital after admission of Harris $100,000 $ 0 $ 50,000

b.

Reamey Nedia Harris

Partnership capital before admission of Harris $100,000 $ 50,000 $ 0
Effect on capital balance as a result of admission of Harris 0 0 50,000
Partnership capital after admission of Harris $100,000 $ 50,000 $ 50,000

Calculation for Harris: $100,000 + $50,000 + $50,000 = $200,000 × (1/4) = $50,000

c.

Reamey Nedia Harris

Partnership capital before admission of Harris $100,000 $ 50,000 $ 0
Effect on capital balance as a result of admission of Harris 3,750 3,750 52,500
Partnership capital after admission of Harris $103,750 $ 53,750 $ 52,500

Calculation for Harris: $100,000 + $50,000 + $60,000 = $210,000 × (1/4) = $52,500

Calculation for Reamey: $100,000 + (($60,000 − $52,500) / 2) = $103,750
Calculation for Nedia: $50,000 + (($60,000 − $52,500) / 2) = $53,750

© 2016 Pearson Education, Ltd. 12-23

E12-19, cont.
Requirement 2

a.

Date Accounts and Explanation Debit Credit

Nedia, Capital 50,000
Harris, Capital 50,000
To record Harris’s purchase of Nedia’s partnership interest.

b.

Date Accounts and Explanation Debit Credit

Cash 50,000
Harris, Capital 50,000
To record Harris’s purchase of a 25% partnership interest.

c.

Date Accounts and Explanation Debit Credit

Cash 60,000
Harris, Capital 52,500
Nedia, Capital 3,750
Reamey, Capital 3,750
To record Harris’s purchase of a 25% partnership interest.

© 2016 Pearson Education, Ltd. 12-24

E12-20 Accounting for withdrawal of a partner
Learning Objective 5
Cash $65,000 CR

The O’Keefe, Pines, and Lowery partnership balance sheet reports capital of $65,000 for O’Keefe,
$105,000 for Pines, and $20,000 for Lowery. O’Keefe is withdrawing from the firm. The partners have
shared profits and losses in the ratio of 1/4 to O’Keefe, 1/4 to Pines, and 1/4 to Lowery. The partnership
agreement states that a withdrawing partner will receive cash equal to the book value of his or her
partners’ equity. Journalize the withdrawal of O’Keefe.

SOLUTION

Date Accounts and Explanation Debit Credit

O’Keefe, Capital 65,000
Cash 65,000
To record withdrawal of O’Keefe from the partnership.

© 2016 Pearson Education, Ltd. 12-25

E12-21 Accounting for withdrawal of a partner
Learning Objective 5
1. Khazeie, Capital $2,400 DR

On March 31, Katherine Bertolla retires from the partnership of Bertolla, Callahan, and Khazeie. The
partner capital balances are Bertolla, $34,000; Callahan, $45,000; and Khazeie, $21,000. The profit-and-
loss-sharing ratio has been 5:3:2 for Bertolla, Callahan, and Khazeie, respectively.

Requirements
1. Journalize the withdrawal of Bertolla assuming she receives $40,000 cash.
2. Journalize the withdrawal of Bertolla assuming she receives $25,000 cash.

SOLUTION

Requirement 1

Date Accounts and Explanation Debit Credit

Mar. 31 Bertolla, Capital 34,000
Callahan, Capital (($40,000 − $34,000) × 3/5) 3,600
Khazeie, Capital (($40,000 − $34,000) × 2/5) 2,400
Cash 40,000
To record withdrawal of Bertolla from the partnership.

Requirement 2

Date Accounts and Explanation Debit Credit

Mar. 31 Bertolla, Capital 34,000
Callahan, Capital (($34,000 − $25,000) × 3/5) 5,400
Khazeie, Capital (($34,000 − $25,000) × 2/5) 3,600
Cash 25,000
To record withdrawal of Bertolla from the partnership.

© 2016 Pearson Education, Ltd. 12-26

E12-22 Accounting for the liquidation of a partnership
Learning Objective 6

Rob Davis, Stewart Vintu, and Vern Wilson are liquidating their partnership. Before selling the assets
and paying the liabilities, the capital balances are Davis $40,000; Vintu, $24,000; and Wilson, $16,000.
The profit-and-loss-sharing ratio has been 1:1:2 for Davis, Vintu, and Wilson, respectively. The
partnership has $64,000 cash, $38,000 non-cash assets, and $22,000 accounts payable.

Requirements
1. Assuming the partnership sells the non-cash assets for $46,000, record the journal entries for the sale
of non-cash assets, allocation of gain or loss on liquidation, the payment of the outstanding
liabilities, and the distribution of remaining cash to partners.
2. Assuming the partnership sells the non-cash assets for $11,000, record the journal entries for the sale
of non-cash assets, allocation of gain or loss on liquidation, the payment of the outstanding
liabilities, and the distribution of remaining cash to partners.

SOLUTION

Requirement 1

Date Accounts and Explanation Debit Credit

Cash 46,000
Gain on Disposal 8,000
Non-cash Assets 38,000
To record sale of non-cash assets at liquidation.

Gain on Disposal 8,000

Davis, Capital ($8,000 × 1/4) 2,000
Vintu, Capital ($8,000 × 1/4) 2,000
Wilson, Capital ($8,000 × 2/4) 4,000
To allocate the gain on liquidation of non-cash assets.

Accounts Payable 22,000

Cash 22,000
To record the payment of the outstanding liabilities.

Davis, Capital 42,000

Vintu, Capital 26,000
Wilson, Capital 20,000
Cash ($64,000 + $46,000 − $22,000) 88,000
To distribute remaining cash based on partners’ capital
balances.

Davis Vintu Wilson

Balances before liquidation $ 40,000 $ 24,000 $ 16,000
Sell assets and allocate gain or loss 2,000 2,000 4,000
Balances for distribution $ 42,000 $ 26,000 $ 20,000

© 2016 Pearson Education, Ltd. 12-27

E12-22, cont.
Requirement 2

Date Accounts and Explanation Debit Credit

Cash 11,000
Loss on Disposal 27,000
Non-cash Assets 38,000
To record sale of non-cash assets at liquidation.

Davis, Capital ($27,000 × 1/4) 6,750

Vintu, Capital ($27,000 × 1/4) 6,750
Wilson, Capital ($27,000 × 2/4) 13,500
Loss on Disposal 27,000
To allocate the loss on liquidation of non-cash assets.

Accounts Payable 22,000

Cash 22,000
To record the payment of the outstanding liabilities

Davis, Capital 33,250

Vintu, Capital 17,250
Wilson, Capital 2,500
Cash ($64,000 + $11,000 − $ 22,000) 53,000
To distribute remaining cash based on partners’ capital
balances.

Davis Vintu Wilson

Balances before liquidation $ 40,000 $ 24,000 $ 16,000
Sell assets and allocate gain or loss (6,750) (6,750) (13,500)
Balances for distribution $ 33,250 $ 17,250 $ 2,500

© 2016 Pearson Education, Ltd. 12-28

Problems (Group A)
P12-23A Determining characteristics of a partnership and accounting for partner contributions
Learning Objectives 1, 2
3. Accounts Payable $35,000 CR

Jaylin Smith and Heff Talas are forming a partnership, Vintage Leather Goods, to import merchandise
from Spain. Smith is especially artistic and will travel to Spain to buy the merchandise. Talas is a super
salesman and has already lined up several department stores to sell the leather goods.

Requirements
1. What is the purpose of the partnership agreement?
2. If the partnership agreement does not state the profit-and-loss-sharing ratios, how will profits or
losses be shared?
3. Smith is contributing $215,000 in cash and accounts payable of $35,000. Talas is contributing a
building that cost Talas $95,000. The building’s current market value is $120,000. Journalize the
contribution of the two partners.

© 2016 Pearson Education, Ltd. 12-29

SOLUTION

Requirement 1

The purpose of the partnership agreement is to delineate the operation of the partnership by establishing
the rules of the partnership. The partnership agreement should include:
a. The name, location, and nature of the business
b. The name, capital contribution, and duties of each partner
c. The procedures for admitting new partners
d. The method of sharing profits and losses among the partners
e. The procedure for withdrawal of assets by the partners
f. The procedure for withdrawal of a partner from the partnership
g. The procedures for liquidating the partnership: selling assets, paying liabilities, and distributing
any remaining cash to the partners.

Requirement 2

If the partners have no partnership agreement specifying how to divide profits and losses, then they
share profits and losses equally.

Requirement 3

Date Accounts and Explanation Debit Credit

Cash 215,000
Accounts Payable 35,000
Smith, Capital 180,000
To record Smith’s contribution.

Building 120,000
Talas, Capital 120,000
To record Talas’s contribution.

© 2016 Pearson Education, Ltd. 12-30

P12-24A Accounting for partner contributions, allocating profits and losses to the partners,
preparing partnership financial statements
Learning Objectives 2, 3
2. Lally, Capital $52,000

Abby Lally and Laura Russo formed a partnership on March 15, 2016. The partners agreed to contribute
equal amounts of capital. Lally contributed her sole proprietorship’s assets and liabilities (credit
balances in parentheses) as follows:

On March 15, Russo contributed cash in an amount equal to the current market value of Lally’s
partnership capital. The partners decided that Lally will earn 70% of partnership profits because she will
manage the business. Russo agreed to accept 30% of the profits. During the period ended December 31,
the partnership earned net income of $77,000. Lally’s withdrawals were $47,000, and Russo’s
withdrawals totaled $23,000.

Requirements
1. Journalize the partners’ initial contributions.
2. Prepare the partnership balance sheet immediately after its formation on March 15, 2016.
3. Journalize the closing of the Income Summary and partner Withdrawal accounts on December 31,
2016.

© 2016 Pearson Education, Ltd. 12-31

SOLUTION

Requirement 1

Date Accounts and Explanation Debit Credit

2016
Mar. 15 Store Equipment 21,000
Merchandise Inventory 39,000
Accounts Receivable 10,000
Prepaid Expenses 3,000
Accounts Payable 21,000
Lally, Capital 52,000
To record Lally’s contribution.

15 Cash 52,000
Russo, Capital 52,000
To record Russo’s contribution.

Requirement 2

LALLY & RUSSO

Balance Sheet
March 15, 2016

Assets Liabilities
Cash $ 52,000 Accounts Payable $ 21,000
Accounts Receivable 10,000
Merchandise Inventory 39,000 Partners’ Equity
Prepaid Expenses 3,000 Lally, Capital 52,000
Store Equipment 21,000 Russo, Capital 52,000
Total Partners’ Equity 104,000
Total Assets $ 125,000 Total Liabilities and Partners’ Equity $ 125,000

© 2016 Pearson Education, Ltd. 12-32

P12-24A, cont.
Requirement 3

Date Accounts and Explanation Debit Credit

2016
Dec. 31 Income Summary 77,000
Lally, Capital 53,900
Russo, Capital 23,100
To close Income Summary to the partners’ capital
accounts.

31 Lally, Capital 47,000

Russo, Capital 23,000
Lally, Withdrawals 47,000
Russo, Withdrawals 23,000
To close partner withdrawals to the partners’ capital
accounts.

© 2016 Pearson Education, Ltd. 12-33

P12-25A Allocating profits and losses to the partners, preparing partnership financial statements
Learning Objectives 2, 3
2. Clay, Capital $55,000

On October 1, 2016, Abdullah, Bookman, and Clay formed the A, B, and C partnership. Abdullah
contributed $21,000; Bookman, $35,000; and Clay, $44,000. Abdullah will manage the store; Bookman
will work in the store three-quarters of the time; and Clay will not work in the business.

Requirements
1. Compute the partners’ shares of profits and losses under each of the following plans:
a. Net loss for the year ended September 30, 2017, is $62,000, and the partnership agreement
allocates 45% of profits to Abdullah, 35% to Bookman, and 20% to Clay. The agreement does
not discuss sharing of losses.
b. Net income for the year ended September 30, 2017, is $80,000. The first $25,000 is allocated on
the basis of relative partner capital balances. The next $40,000 is based on services, with $30,000
going to Abdullah and $10,000 going to Bookman. Any remainder is shared equally.
2. Using plan b, prepare the partnership statement of partners’ equity. Assume Abdullah, Bookman,
and Clay each withdrew $5,000 from the partnership during the year.

SOLUTION

Requirement 1

a. In the absence of a loss sharing method in the partnership agreement, the losses are shared in the
same method as the profits. In this scenario, the losses are shared as follows:

Abdullah: $27,900 ($62,000 × 45%)

Bookman: $21,700 ($62,000 × 35%)
Clay: $12,400 ($62,000 × 20%)

b.
Capital Balance Equal Share of
Capital Share − % of Service Share Remaining
Partner % $25,000 of $40,000 $15,000 Total Share
Abdullah 21% $ 5,250 $ 30,000 $ 5,000 $ 40,250
Bookman 35% 8,750 10,000 5,000 23,750
Clay 44% 11,000 5,000 16,000
100% $ 25,000 $ 40,000 $ 15,000 $ 80,000

© 2016 Pearson Education, Ltd. 12-34

P12-25A, cont.
Requirement 2

ABDULLAH, BOOKMAN & CLAY

Statement of Partners’ Equity
For The Year Ended September 30, 2017

Abdullah Bookman Clay Total

Capital, October 1, 2016 $ 0 $ 0 $ 0 $ 0
Partner contributions 21,000 35,000 44,000 100,000
Net income 40,250 23,750 16,000 80,000
61,250 58,750 60,000 180,000
Partner withdrawals (5,000) (5,000) (5,000) (15,000)
Capital, September 30, 2017 $ 56,250 $ 53,750 $ 55,000 $ 165,000

P12-26A Accounting for the admission of a new partner

Learning Objective 4
4. Longval, Capital $15,400 DR

Hanson, Mahoney, and Longval, a partnership, is considering admitting Kellan Young as a new partner.
On July 31, 2016, the capital accounts of the three existing partners and their profit-and-loss-sharing
ratio is as follows:

Requirements
Journalize the admission of Young as a partner on July 31 for each of the following independent
situations:
1. Young pays Longval $168,000 cash to purchase Longval’s interest.
2. Young contributes $84,000 to the partnership, acquiring a 1/4 interest in the business.
3. Young contributes $84,000 to the partnership, acquiring a 1/6 interest in the business.
4. Young contributes $84,000 to the partnership, acquiring a 1/3 interest in the business.

© 2016 Pearson Education, Ltd. 12-35

SOLUTION

Requirement 1

Date Accounts and Explanation Debit Credit

2016
Jul. 31 Longval, Capital 126,000
Young, Capital 126,000
To record Longval’s purchase of Young’s capital.

Requirement 2

Partnership capital before admission of Young $ 252,000

Contribution of Young 84,000
Partnership capital after admission of Young $ 336,000

Capital of Young ($336,000 × 1/4) $ 84,000

Capital of Young $ 84,000

Contribution of Young (84,000)
Bonus to Young $ 0

Date Accounts and Explanation Debit Credit

2016
Jul. 31 Cash 84,000
Young, Capital 84,000
To record Young’s purchase of a 25% partnership interest.

© 2016 Pearson Education, Ltd. 12-36

P12-26A, cont.
Requirement 3

Partnership capital before admission of Young $ 252,000

Contribution of Young 84,000
Partnership capital after admission of Young $ 336,000

Capital of Young ($336,000 × 1/6) $ 56,000

Capital of Young $ 56,000

Contribution of Young (84,000)
Bonus to Young $ (28,000)

Date Accounts and Explanation Debit Credit

2016
Jul. 31 Cash 84,000
Young, Capital 56,000
Hanson, Capital ($28,000 × 20%) 5,600
Mahoney, Capital ($28,000 × 25%) 7,000
Longval, Capital ($28,000 × 55%) 15,400
To record Young’s purchase of a 1/6 partnership interest.

© 2016 Pearson Education, Ltd. 12-37

P12-26A, cont.
Requirement 4

Partnership capital before admission of Young $ 252,000

Contribution of Young 84,000
Partnership capital after admission of Young $ 336,000

Capital of Young ($336,000 × 1/3) $ 112,000

Capital of Young $ 112,000

Contribution of Young (84,000)
Bonus to Young $ 28,000

Date Accounts and Explanation Debit Credit

2016
Jul. 31 Cash 84,000
Hanson, Capital ($28,000 × 20%) 5,600
Mahoney, Capital ($28,000 × 25%) 7,000
Longval, Capital ($28,000 × 55%) 15,400
Young, Capital 112,000
To record Young’s purchase of a 1/3 partnership interest.

© 2016 Pearson Education, Ltd. 12-38

P12-27A Accounting for withdrawal of a partner
Learning Objective 5
2. Notes Payable $18,000 CR

Hu-Kuo-Lo Oriental Design is a partnership owned by three individuals. The partners share profits and
losses in the ratio of 30% to Hu, 40% to Kuo, and 30% to Lo. At December 31, 2016, the firm has the
following balance sheet. On December 31, Hu withdraws from the partnership.

Requirements
Record Hu’s withdrawal from the partnership under the following independent plans:
1. In a personal transaction, Hu sells her equity to Wong, who pays Hu $140,000 for her interest. Kuo
and Lo agree to accept Wong as a partner.
2. The partnership pays Hu cash of $15,000 and gives her a note payable for the remainder of her book
equity in settlement of her partnership interest.
3. The partnership pays Hu $45,000 for her book equity.
4. The partnership pays Hu $18,000 for her book equity.

© 2016 Pearson Education, Ltd. 12-39

SOLUTION

Requirement 1

Date Accounts and Explanation Debit Credit

2016
Dec. 31 Hu, Capital 33,000
Wong, Capital 33,000
To record Wong’s purchase of Hu’s capital.

Requirement 2

Date Accounts and Explanation Debit Credit

2016
Dec. 31 Hu, Capital 33,000
Cash 15,000
Note Payable 18,000
To record the withdrawal of Hu from the partnership.

Requirement 3

Date Accounts and Explanation Debit Credit

2016
Dec. 31 Hu, Capital 33,000
Kuo, Capital ($12,000 × 4/7) 6,857
Lo, Capital ($12,000 × 3/7) 5,143
Cash 45,000
To record the withdrawal of Hu from partnership.

Requirement 4

Date Accounts and Explanation Debit Credit

2016
Dec. 31 Hu, Capital 33,000
Kuo, Capital ($15,000× 4/7) 8,571
Lo, Capital ($15,000 × 3/7) 6,429
Cash 18,000
To record the withdrawal of Hu from partnership.

© 2016 Pearson Education, Ltd. 12-40

P12-28A Accounting for the liquidation of a partnership
Learning Objective 6
2. Loss on Disposal $25,000

The partnership of Sole, Pan, & Melendez has experienced operating losses for three consecutive years.
The partners—who have shared profits and losses in the ratio of Sole, 10%; Pan, 70%; and Melendez,
20%—are liquidating the business. They ask you to analyze the effects of liquidation. They present the
following condensed partnership balance sheet at December 31, 2016:

Requirements
1. Assume the non-cash assets are sold for $135,000. Journalize the liquidation transactions.
2. Assume the non-cash assets are sold for $90,000. Journalize the liquidation transactions.

© 2016 Pearson Education, Ltd. 12-41

SOLUTION

Requirement 1

Date Accounts and Explanation Debit Credit

2016
Dec. 31 Cash 135,000
Gain on Disposal 20,000
Non-cash Assets 115,000
To record the sale of non-cash assets at liquidation.

31 Gain on Disposal 20,000

Sole, Capital ($20,000 × 10%) 2,000
Pan, Capital ($20,000 × 70%) 14,000
Melendez, Capital ($20,000 × 20%) 4,000
To allocate the gain on liquidation of non-cash assets.

31 Accounts Payable 60,000

Cash 60,000
To record the payment of the outstanding liabilities.

31 Sole, Capital 26,000

Pan, Capital 63,000
Melendez, Capital 35,000
Cash 124,000
To distribute remaining cash based on partners’ capital
balances.

© 2016 Pearson Education, Ltd. 12-42

P12-28A, cont.
Requirement 2

Date Accounts and Explanation Debit Credit

2016
Dec. 31 Cash 90,000
Loss on Disposal 25,000
Non-cash Assets 115,000
To record the sale of non-cash assets at liquidation.

31 Sole, Capital ($25,000 × 10%) 2,500

Pan, Capital ($25,000 × 70%) 17,500
Melendez, Capital ($25,000 × 20%) 5,000
Loss on Disposal 25,000
To allocate the loss on liquidation of non-cash assets.

31 Accounts Payable 60,000

Cash 60,000
To record the payment of the outstanding liabilities.

31 Sole, Capital 21,500

Pan, Capital 31,500
Melendez, Capital 26,000
Cash 79,000
To distribute remaining cash based on partners’ capital
balances.

© 2016 Pearson Education, Ltd. 12-43

P12-29A Allocating profits and losses to the partners, accounting for the liquidation of a
partnership
Learning Objectives 3, 6
2. Baker, Capital Bal. $39,000

ABC is a partnership owned by Ales, Baker, and Chaplin, who share profits and losses in the ratio of
2:1:1, respectively. The account balances of the partnership at June 30, 2016, follow:

Requirements
1. Prepare the June 30 entries to close the revenue, expense, income summary, and withdrawal
accounts.
2. Open each partner’s capital T-account with the adjusted balance, post the closing entries to their
accounts, and determine each partner’s ending capital balance.
3. Prepare the June 30 entries to liquidate the partnership assuming the non-cash assets are sold for
$118,000.

© 2016 Pearson Education, Ltd. 12-44

SOLUTION

Requirement 1

Date Accounts and Explanation Debit Credit

2016
Jun. 30 Sales Revenue 164,000
Income Summary 164,000
To close sales revenue to income summary.

30 Income Summary 80,000

Salaries Expense 64,000
Rent Expense 16,000
To close expenses into income summary.

30 Income Summary 84,000

Ales, Capital 42,000
Baker, Capital 21,000
Chaplin, Capital 21,000
To close income summary to the partners’ capital accounts.

30 Ales, Capital 14,000

Ales, Withdrawals 14,000
To close withdrawals to partner’s capital account.

30 Baker, Capital 30,000

Baker, Withdrawals 30,000
To close withdrawals to partner’s capital account.

30 Chaplin, Capital 53,000

Chaplin, Withdrawals 53,000
To close withdrawals to partner’s capital account.

© 2016 Pearson Education, Ltd. 12-45

P12-29A, cont.
Requirement 2

Ales, Capital
20,000 Jun. 30
42,000 Clos. 3
Clos. 4 14,000
48,000 Bal.

Baker, Capital
48,000 Jun. 30
21,000 Clos. 3
Clos. 4 30,000
39,000 Bal.

Chaplin, Capital
53,000 Jun. 30
21,000 Clos. 3
Clos. 4 53,000
21,000 Bal.

Requirement 3

Date Accounts and Explanation Debit Credit

2016
Jun. 30 Cash 118,000
Gain on Disposal 7,000
Non-cash Assets 111,000
To record the sale of non-cash assets at liquidation.

30 Gain on Disposal 7,000

Ales, Capital ($7,000 × 2/4) 3,500
Baker, Capital ($7,000 × 1/4) 1,750
Chaplin, Capital ($7,000 × 1/4) 1,750
To allocate the gain on liquidation of non-cash assets.

30 Notes Payable 33,000

Cash 33,000
To record the payment of the outstanding liabilities.

30 Ales, Capital 51,500

Baker, Capital 40,750
Chaplin, Capital 22,750
Cash 115,000
To distribute remaining cash based on partners’ capital
balances.

© 2016 Pearson Education, Ltd. 12-46

P12-30A Allocating profits and losses to the partners, accounting for withdrawal of a partner,
accounting for the liquidation of a partnership, and preparing partnership financial statements
Learning Objectives 2, 3, 5, 6
1. End. Bal. Olay, Capital $60,125

LOT is a partnership owned by Maggie Lafleur, Susan Olay, and Tara Thibert. The partners’ profit-and-
loss-sharing agreement is 3:1:4, respectively. The adjusted trial balance of the partnership at November
30, 2016, follows:

Requirements
1. Prepare statement of partners’ equity for the month ended November 30, 2016. Use a separate
column for each partner in the statement of partners’ equity. Assume no new capital contributions
during November.
2. Prepare the four closing entries for the month ended November 30, 2016.
3. Thibert decides to withdraw from the partnership on December 1, 2016. Her settlement includes all
the Merchandise Inventory and all of the Cash in exchange for her equity interest in the partnership.
4. Immediately after Thibert’s withdrawal, Lafleur and Olay decide to liquidate the partnership. They
sell the building for $172,000. Then they pay the liabilities and distribute the cash to complete the
liquidation. Journalize these liquidation entries. Assume the profit-and-loss-sharing ratios remain the
same.

© 2016 Pearson Education, Ltd. 12-47

SOLUTION

Requirement 1
LOT
Statement of Partners’ Equity
For The Month Ended November 30, 2016

Olay Thibert Total

Lafleur
Capital, November 1, 2016 $ 50,000 $ 65,000 $ 35,000 $ 150,000
Net loss (5,625) (1,875) (7,500) (15,000)
44,375 63,125 27,500 135,000
Partner withdrawals (9,000) (3,000) (5,000) (17,000)
Capital, November 30, 2016 $ 35,375 $ 60,125 $ 22,500 $ 118,000

Requirement 2
Date Accounts and Explanation Debit Credit
2016
Nov. Sales Revenue 65,000
30
Income Summary 65,000
To close sales revenue to income summary.

30 Income Summary 80,000

Cost of Goods Sold 38,000
Salaries Expense 26,000
Rent Expense 16,000
To close expenses into income summary.

30 Lafleur, Capital 5,625

Olay, Capital 1,875
Thibert, Capital 7,500
Income Summary 15,000
To close income summary to the partners’ capital accounts.

30 Lafleur, Capital 9,000

Lafleur, Withdrawals 9,000
To close withdrawals to partner’s capital account.

30 Olay, Capital 3,000

Olay, Withdrawals 3,000
To close withdrawals to partner’s capital account.

30 Thibert, Capital 5,000

Thibert, Withdrawals 5,000
To close withdrawals to partner’s capital account.

© 2016 Pearson Education, Ltd. 12-48

P12-30A, cont.
Requirement 3

Date Accounts and Explanation Debit Credit

2016
Dec. 1 Thibert, Capital 22,500
Merchandise Inventory 4,000
Cash 4,000
Lafleur, Capital 10,875
Olay, Capital 3,625
To record the withdrawal of Thibert from partnership.

Requirement 4

Date Accounts and Explanation Debit Credit

2016
Dec. 1 Cash 172,000
Accumulated Depreciation – Building 35,000
Loss on Disposal 28,000
Building 235,000
To record the sale of non-cash assets at liquidation.

1 Lafleur, Capital ($28,000 × 3/4) 21,000

Olay, Capital ($28,000 × 1/4) 7,000
Loss on Disposal 28,000
To allocate the loss on liquidation of non-cash assets.

1 Accounts Payable 15,000

Mortgage Payable 75,000
Cash 90,000
To record the payment of the outstanding liabilities.

1 Lafleur, Capital 25,250

Olay, Capital 56,750
Cash 82,000
To distribute remaining cash based on partners’ capital
balances.

© 2016 Pearson Education, Ltd. 12-49